Wealth builder

Shares are divided into ‘sectors’ in the stock exchange. Rickey Ward of JBWere analyses the trends affecting five of these sectors.

Sectors are broad groupings of stocks within the share market, based on companies in similar industries, or business types.

In general, companies within the same sector tend to share similar rates of revenue and earnings growth, stock price performance, and earnings forecasts – especially over short- and medium-term time periods.

The sector is an odd one, given its collection of what appear to be unrelated companies linked to transport, building products, and professional services. While 2017 provided a mixed bag of results, as a general rule, the trend for share prices was definitely up.

Winners and losers

Opus International was a standout, following the helpful hand of a corporate takeover. Mainfreight continued to truck along, and a particularly strong contribution from Australia gave it another good year. Air New Zealand was named Airline of the Year and was one of the better share-price performers. Local glass manufacturer Metro Performance Glass was perhaps the biggest disappointment in a group where disenchantment was hard to find. It’s been a challenging start to listing for a company which should have performed better, although green shoots did appear towards the end of the year.

My prediction

Looking ahead, it’s difficult to see what will change.

Metro Performance Glass should benefit from a supportive government, but whether it can profit remains the key question. Mainfreight is exposed to offshore markets in a sector benefiting from structural change, so finding support shouldn’t be hard.

Analysts predict a slowing in our domestic economy, so offshore earners are preferred over local. Auckland Airport enters 2018 with a higher capital spending programme, which will have an effect on profit growth. Finding value among the industrials sector remains difficult and, where it does exist, it often comes with some health warnings.

Information Technology

Definition

The information technology sector is made up of goods and services to do with technology, research, and development.

It contains firms working in electronics, software, computers, and programming.The landscape

Technology has long been considered the sector of opportunity, and many famous names are at its heart. History shows investors have won and lost fortunes from these investments which, quite frankly, many struggle to value. Investing in this sector isn’t for the faint-hearted, with many firms needing a steady stream of money and shareholder loyalty to survive.

Winners and losers

Some make it, some don’t; and 2017 proved no different, with Wynyard finally succumbing to the liquidator in February and delisting in May. Most, though, enjoyed a better year, and none more so than Xero. Had it not announced its delisting from the New Zealand market, the year would have been one to remember for a name that is nearing a maiden profit. Thankfully, today the sector is not solely reliant on Xero. The likes of Eroad, Gentrack, and Pushpay have all enjoyed a better year and are quickly developing a following.

My prediction

Looking ahead, capital or, more importantly, the need for it, will be a feature for many companies. Many are priced for potential, more than actual, earnings, so positive commentary and revenue growth are pivotal to get them support. History also shows a positive re-rating can as easily be followed by a de-rating, with no apparent justification. Takeovers are rare, but can never be ruled out, but the temptation for founding shareholders to take profits must be increasing. We’ve seen early signs of this already. Either way, the sector will stay a game you can win or lose.

There was only one name talked about all year in this sector – Fletcher Building. Entering the year, investors had high hopes, but these soon evaporated. A backdrop of low interest rates, a strong housing market, infrastructure projects, and a supportive government did little to help a sector facing rising costs.

Winners and losers

Despite Fletchers grabbing the most attention, labour shortages and wage rises meant these problems weren’t unique to them. These led to cost overruns, ongoing write-offs, and endless rumours, all distracting from day-to-day management. An inability to offer certainty around outstanding work meant investor sentiment quickly turned sour.

Fletchers became a difficult proposition. Steel & Tube faced similar troubles, hurt by Commerce Commission charges over breaches to the Fair Trading Act and intensifying competition. Returns for the sector were hard to come by.

My prediction

Looking ahead, it will be all about one of two things for Fletchers: the size of further provisions or the potential sale of non-performing assets. Fletchers is big enough to survive the 2017 nightmare, but it needs to restore its credibility, and that starts with communication that can be relied upon. Most dismiss the latest announcement as being the last on cost overruns, but all eyes will be focused on the Commercial Bay development, which is nearing completion.

Telecommunications

Definition

The telecoms sector is made up of companies connected to phone, satellite, or internet services, or those that create the infrastructure to send data around the world.

The landscape

In the past, when you mentioned the word telecommunications, eyes would glaze over. People talk about their own problems – lack of internet connectivity, phone charges, or the latest handset – rather than how each firm generates profits or offers dividends. Regulation has forced many to succumb to increasing capital demands, globalisation, and price pressures. Cost-cutting was another feature last year for a sector enjoying the benefits of increased data usage.

Winners and losers

Traditional business continues to follow a path to nowhere, which is perhaps why we have seen the likes of Spark search for alternative sources of revenue. Competition is intense, but it was perhaps the Commerce Commission’s decision to rebuff a merger between Sky TV and Vodafone New Zealand, which surprised many. It had a big effect, given the reliance on content to drive demand, prices, and remain relevant. Content is pivotal to remaining king.

My predictionLooking ahead, all eyes will be on the Vodafone New Zealand listing on the stock exchange, which is expected in the first half of 2018. It might be our only initial public offering this year. Competition will not go away and could even intensify, given the increased scrutiny that comes with listing. Telecommunication companies have always offered reliable income. I don’tsee this changing, but profit growth appears, at best, flat for 2018.

When investors consider utility companies, they tend to think about reliable income from electricity companies, which are effectively under government control. Outside of weather, most don’t consider other factors that could just as easily affect future demand and profits.

Winners and losers

In the past, there’ve been concerns around New Zealand's Aluminium Smelter, but it was hardly mentioned in 2017. Investors instead focused on renewable energy, electric vehicles, and carbon emissions, following the change in government. New Zealand First’s campaign message about buying back electricity companies grabbed headlines, but never gained traction. However, this didn’t stop talk of increased regulation. Return-wise, you could have thrown a blanket over the entire sector.

There was little difference in firms’ performances and where they varied, it was around the edges. Capital management continued to be a highlight, with improving dividend payments a welcome relief.

My prediction

It’s difficult to see why the past won’t be repeated. Balance sheets remain healthy and changes in management here and there won’t move the dial. Increased government spending is unlikely to see any negative policy introduced. The sector is a great source of income. Should New Zealand's Aluminium Smelter decide to leave, we expect the sector to quickly rebalance.

There hasn’t been any major investment in new power generation for some time, so demand is catching up to supply. It’s a safe place to park, but I think it’s hard to see how 2017’s performance could be repeated.

First published Autumn 2018

Story by Rickey Ward

This article is intended as a source of general information only. Before acting on anything in this article, you should assess whether the advice is appropriate in light of your own financial circumstances, or contact a financial adviser. The disclosure statement for each JBWere adviser is available on request, free of charge.

The editorial above reflects the views of the editorial contributor only and content may be out of date. This article is sourced from a previous JUNO issue. JUNO’s content comes from sources that it considers accurate, but we do not guarantee that the content is accurate. Charts are visually indicative only. JUNO does not contain financial advice as defined by the Financial Advisers Act 2008. Consult a suitably qualified financial adviser before making investment decisions.

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